9911796707
TMI Blog1935 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ion contained in the schedule to the Indian Companies Act govern the company. Article 73 is the relevant article to be considered on this point. That article runs as follows : "The amount for the time being remaining undischarged of moneys borrowed or raised by the directors for the purposes of the company (otherwise than by the issue of share capital) shall not at any time exceed the issued share capital of the company without the sanction of the company in general meeting." The question for consideration is what is the proper construction of this article. It is contended on behalf of Sassoons that the words "for the time being" mean "when the claim is made." It is contended that whatever be the initial borrowing by the directors that is not a matter to be inquired into by the Court. I do not think the terms of the article justify such a narrow construction. The article in terms fixes the limit at any time and although the validity of the claim may have to be considered in respect of the amount claimed on the date of liquidation I am unable to consider that the article in terms refers only to that point of time and no other. On behalf of the claimants it is contended that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and the Act of Parliament; and the said resolution had remained unrescinded. In the judgment Jervis, C. J., observed as follows (p. 331): "My impression is .that the resolution set forth in the replication goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorized to be borrowed: and the replication shows a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special non est factum, does not raise any objection to this advance as against the company. We may now take for granted that the dealings with these companies are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the votes of all the share-holders given at a general meeting. In construing the terms of this article their Lordships of the Privy Council held that it was very clearly beyond the authority of the directors to borrow, upon the credit of the company, and sum exceeding one-half of the actually paid up capital of the company. There is no doubt that the authority of the directors, limited as it was by the article, was capable of being extended under the provisions of Article 31. But by that article one-half of the votes of the shareholders given at a general meeting called for the purpose was necessary. It was not contended that the authority of the directors to borrow was ever extended at a general meeting of the share-holders held for the purpose and therefore the lender was not entitled to presume that the directors had any authority to borrow beyond the prescribed limits. In the course of the judgment their Lordships considered the applicability of Royal British Bank v. Turquand and observed as follows: "The case of Royal British Bank v. Turquand was decided with reference to a company registered under 7 and 8 Viet., C. 110, and Jervis, C. J., remarked that the lend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk v. Turquand does not apply. The liquidator further relies on the decision in Sinclair v. Brougham in which it was held that if a company is not authorized to borrow any money and if money in fact is borrowed, no claim can be maintained by the lender against the company on the footing either of debt or of money had and received. In that case, Viscount Haldane, L.C., while considering an unauthorized borrowing by a company which was a statutory society and had no power to borrow, observed as follows: "If it be outside the power of a statutory society to enter into the relation of debtor and creditor in a particular transaction, the only possible remedy for the person who has paid the money would, on principle, appear to be one in rent and not in personam, a claim to follow and recover specifically any money which could be earmarked as never having ceased to be his property. To hold that a remedy will lie in personam against a statutory society, which by hypothesis cannot in the case in question have become a debtor or entered into a contract for repayment, is to strike at the root of the doctrine of ultra vires as established in the jurisprudence of this country. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hibited by statute from borrowing any money and therefore any borrowing by the company, i.e., the principal itself would be ultra vires. The observations of Lord Haldane, L.C., apply, in my opinion, to that set of facts alone. I am further supported in this view by the decision in Troup's case, where it was held that when the directors of a company have no power to borrow, a person lending money to the company cannot enforce payment of it against the company unless it had been bona fide applied to the purposes of the company. In that case the directors having no borrowing powers, being pressed for money by their contractor, obtained for him, on credit, 2,000 at a banker's upon their guarantee. The contractor afterwards agreed to abandon the plant, etc., to the company, on receiving 600 and being indemnified against the banker's claim. Subsequently to this, the secretary of the company, with the sanction of the directors, borrowed 500 in his own name for the company, which was applied in paying the bankers and a judgment debt of the company. The company had the benefit of the plant, etc. It was held that the secretary could recover the amount from the company with int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debit of 24,506 and odd made up of the sums he had drawn and the 1,500 loan. No settling day was ever granted and the plaintiffs' company afterwards went into liquidation under a winding-up order. A suit was filed to recover the whole amount to the credit of the plaintiffs. The defendants paid the bonus of 600 into Court, and denied liability as to the residue. It is apparent on the facts that the directors and parties were not authorized to do the acts for the company and the same were not therefore binding on the company. It was, however, held that the plaintiffs were entitled to the re-payment of 1,500 actually paid by them to the defendants but to no more. This case, in my opinion, is a clear authority for the proposition that money actually received by the company and used for its business can be recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at p. 314, this case is relied upon for the following proposition: "Apart from ratification, the company will be answerable for any property which has come into its possession through the unauthorized acts of the directors." It is argued on behalf of the liquidator that Irvine v. Union Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, was not the point in issue before the Privy Council. Towards the end of the judgment it is specifically pointed out that "for the above reasons their Lordships are of the opinion that the plaintiffs are not entitled, as against the defendant, to a charge on the property beyond the amount of one half of 17,100 the paid-up capital of the company." The form of the order finally made also makes this clear. It was as allows "Their Lordships will, therefore, further advise Her Majesty that it be ordered that the costs of the suit in the lower Court, both of the plaintiffs and of the defendant respectively, as taxed by the lower Court, be paid to the said parties respectively out of the proceeds of the sale of the property which are now in Court, and that out of the balance of such proceeds there be paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange current between Rangoon and England at the time of filing of the suit, to the principal sum of 8,550, with interest thereon, at the rate of 8 per cent, from October 5, 1872 to the date of the sale of the property, together with a proportionate part of the accumulations, if any, of the proceeds of the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly borrowed on debentures diverse sums of money, which were applied in discharging the debts and liabilities of the company. The debenture debts regularly appeared in the reports of the directors which were confirmed at the annual general meeting of the share-holders, and interest was regularly paid, with the consent of share-holders, until the winding up of the company, a period of 2 years. It was held that though the debentures were clearly improperly issued, yet as the money had been raised and applied for the benefit of the company, and the share-holders had acquiesced for two years, it was too late to dispute their validity. The report shows that the holders of the debentures themselves were present at the meeting of the shareholders, which passed the resolution, and were therefore, conscious of the irregularity of the meeting. It is" urged that this case distinctly supports the contention of M.T. Ltd., because the balance-sheets showed the amount from time to time due by the company to M.T. Ltd., and also showed the amounts from time to time paid by way of interest to M.T. Ltd. in respect of these borrowings. It is pointed out that at no time before the liquidation any shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worth, who held that when the directors bad exceeded their legal powers and the share-holders took no steps in the matter but allowed the things done to remain unimpeached for years they must be taken to have retrospectively sanctioned what had been done, the fact that the share-holders were aware that the directors had been exceeding their legal powers was emphasized. In In re Railway and General Light Improvement Co., Matzetti's Case the question again came to be considered. In that case a certain item of expenditure was included in a larger item in the balance-sheet and that balance-sheet was passed by the share-holders at their meeting. The item included was shown to be unauthorized expenditure. Brett, L.J., in considering the question of ratification observed as follows: "But it cannot be said that the company ratified the payment by passing it unquestioned on the balance-sheet, unless it appeared there in such a way as to attract the attention of persons of ordinary care. There must have been direct notice, or notice sufficient to put a person of ordinary care upon inquiry as to the item. The mere statements on the balance-sheet in this case would not have put such a pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of M.T. Ltd., that the company by adopting the balance-sheets had ratified the borrowings, cannot be accepted. It is next contended on behalf of the liquidator, that the claim now made by M.T. Ltd., wholly represents the balance of unauthorized borrowings. This contention is based on the argument that in considering the account of borrowings and repayments the rule in Clayton's case does not apply. In this connection reliance is placed on the decisions in Blackburn and District Benefit Building Society v. Cunliffe, Brooks Co. Cunliffe Brooks Co. v. Blackburn and District Benefit Building Society, Blackburn and District Benefit Building Society v. Cunliffe Brooks Co. and Sinclair v. Brougham. Having regard to the view I have taken, it is not necessary to decide this. As, however, an elaborate argument was addressed to me, I think I should shortly express my opinion on the point. I do not think the liquidator's contention in this connection is correct. The first three authorities relied upon by the liquidator do not help him. In those cases an attempt was made by the claimant to show that the money advanced had been applied towards the payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail. The observations and principles contained in Sinclair v. Brougham, with regard to making a tracing order, were fully argued. Having regard to my finding the question does not arise, and, therefore, I do not propose to examine the cases cited on the point. It was lastly contended on behalf of the liquidator that no further call on the shareholders should be made. That contention is based on Sinclair v. Brougham. I do not think that case stands in the way of M.T. Ltd. The principles there discussed were for finding how the assets which were the outcome of a wholly ultra vires business were to be divided between the creditors of the ultra vires business and the share-holders of the same ultra vires business. In the present case, M.T. Ltd., claim a sum of money payable from the company in liquidation, and if the claim is allowed, all the liabilities of the shareholders to satisfy the claim of a person who is entitled to the payment of a specified sum of money must follow. I shall consider next the claim of Sassoons. It is contended on behalf of the liquidator that the agreement of February 28, 1928, is not valid and binding on the company because it is a suretysh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bankers and which formed part of the 14,000 due from the contractor. In this state of things an indenture of mortgage was executed by G of the first part, the company of the second part and the bankers of the third part, which recited the contract with G and that he had since erected diverse building and machinery in pursuance of the contract. It further recited that G had received 19,578 from the company in part-payment and that a large sum still remained due to him from the company under the contract; that G was possessed of machinery and that he was indebted to the bankers for money advanced for the purposes of the contract; that the company was indebted to the bankers in l,272 and that G had applied to the bankers to make him further advances to enable him to carry out the work which the bankers had agreed to do on having the re-payment of the sum of 14,289, the balance which was due by G to the bankers, and 1,272 which was due by the company to the bankers, and any other sum advanced by them to G secured as mentioned in the deed. By the indenture, G and the company covenanted to pay to the bankers 14,239 and 1,272 with all further sums advanced to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said sum with interest thereon, and to secure re-payment of the moiety thereof by the mortgagor depositing the title-deeds relating to belonging to the mortgagor and to secure re payment of the other moiety by the surety depositing with the mortgagee by way of equitable security the title deeds relating to the said properties ..particularly described in the first and second schedules hereunder written, and whereas the mortgagee hath already paid ' to the mortgagor the said sum of Rs. 9,00,000 (nine lacs) as the mortgagor doth hereby admit and acknowledge out of which the mortgagor hath paid to the surety a sum of over Rs. 4,50,000 (four lacs and fifty thousand) as the surety doth hereby admit and acknowledge And whereas the surety also hath deposited with the mortgagee the title-deeds of the said lands belonging to it and whereas the mortgagee hath called upon the mortgagor and the surety to execute these presents evidencing the said deposit of title deeds as such security now this indenture witnesseth that in consideration of the amount lent and advanced to it by the mortgagor out of the said sum of Rs. 9,00,000 (nine lacs) lent and advanced to the mortgagor by the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed to give by way of security its own property and the company's property; (5) that the company had already deposited with Sassoons the title-deeds of their property; (6) that Sassoons had called upon M.T. Ltd., and the company to execute the document evidencing the deposit of the said title-deeds as security; (7) that in consideration of the amount lent and advanced M.T. Ltd., had already deposited the title-deeds of their property by way of equitable mortgage for the repayment to Sassoons of the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000; (8) that by the document M.T. Ltd., and the company did jointly and severally agree to repay to Sassoons on October 31,1931, the said sum of Rs. 4,50,000 with interest; and (9) that the company agreed to execute at its own costs, when called upon, a proper legal mortgage in favour of Sassoons of the said lands and building to secure the said sum of Rs. 4,50,000, acknowledged to be received by the company out of the said Rs. 9,00,000. In order to decide whether the transaction is ultra vires the company or not, it is necessary to have regard to these facts read along with clause 3 ( f ) of the memorandum of association of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into the possession and coffers of the company. It is a case where both M.T. Ltd., and the company jointly promise to pay the Sassoons the sum of Rs. 4,50,000 because at the initial stage M.T. Ltd. borrowed Rs. 9,00,000 from Sassoons and the company admitted that out of that sum a sum of Rs. 4,50,000 was actually received by them and which they were liable to make good to M.T. Ltd. when called upon. The difference between the position of a surety and a joint debtor is made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In that case the plaintiff lent money to A upon B's promise to become surety for its repayment, and after the money was advanced A and B signed and delivered to the plaintiff the following memorandum: "We jointly and severally owe you 60 ." It was held that this was evidence for the jury of "an account stated by A and B jointly." In Guild Co. v. Conrad, the defendant orally promised the plaintiff that if he (the plaintiff) would accept certain bills for a firm in which the defendant's son was a partner, he (the defendant) would provide the plaintiff with funds to meet the bills. It was held that this was not a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication, having regard to the terms of Article 73 of the articles of association in Table A read with Clause 3( f ) of the memorandum of association, the directors had power to give security in respect of a sum not exceeding Rs. 5,00,000. As under the deed of mortgage Rs. 4,50,000 are shown on the face of the document to be borrowed by the company and for which Sassoons received a security, the transaction appears to be within the competence of the directors and is binding on the company. The borrowing in excess by the directors from M.T. Ltd. does not touch the validity of the deed of mortgage or the rights of Sassoons thereunder, because if the security is treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that the security is given for the unauthorized portion of the borrowing. This is on the ground that when a man has the power to do the right thing and does a thing which is capable of being taken either as the right thing or in excess of his power to do this right thing, it should be presumed the he had done the right thing, especially when the rights of third parties would be adversely affected on the other construction. In my opinion equity demands that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilized by the company shows the consideration which moved the company to execute this document in favour of Sassoons. It should be remembered that under the Contract Act if Sassoons give time to M.T. Ltd. to pay their debt to Sassoons, that would be sufficient consideration in law to sustain the promise by the company to pay to Sassoons Rs. 4,50,000 out of the sum of Rs. 9,00,000 under the circumstances mentioned in the deed. It is next contended that the resolution of the directors authorizing the execution of the document is bad, and in this connection reliance is placed on Article 77 of Table A and Section 91-B, Companies Act. It is pointed out that Mr. A. J. Raymond was a party to the resolution and was the managing director of Sassoons and had the full powers of the board of directors. It is further pointed out that Sassoons is a private limited company and all the directors of M.T. Ltd. were parties, to this resolution. It is argued that the deed of mortgage is a tripartite agreement in which all the three companies and directors were interested and therefore there was no independent person to vote at the meeting of the directors held on February, 1928. Under these circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his, it is argued by the liquidator that without there being contract between M.T. Ltd., and the company, how can a contract, as contained in the deed of mortgage, come into existence? In my opinion this last argument is futile. Because the contract contained in the deed of mortgage exists between the company and M.T. Ltd. on the one hand and Sassoons on the other hand, it is not necessary that the arrangement or contract between M.T. Ltd, and the company must be contained in the same document. It is further contended against the liquidator that the interest mentioned in Article 77 and Section 91-B, Companies Act, is some personal interest which is not in common with the other share holders. For that purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and the remarks at p. 629 where it is pointed out that the interest should be one not in common with the others. Reliance is also placed on behalf of the claimants on the terms of Section 91-B. In my opinion there is considerable force in the contentions urged on behalf of the claimants. I do not think, however, that it is necessary to go into this part of the argument. It is common ground that a resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted with notice of all that is contained in those two documents". "After that, the company entering, upon its business and dealing with persons external to it, is supposed on its part to have all those powers and authorities which, by its articles of association and by its deed, it appears to possess; and all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association or by the deed." It is, therefore, not permissible in a case like this to inquire whether there was a proper quorum for holding a meeting or whether the meeting of the directors authorizing the execution of the deed of mortgage was properly convened. These are matters of the internal management of the company, and under the principles contained in Royal British Bank v. Tarquand the company is bound by the resolution, so far as outsiders are concerned. No irregularity in the internal management would therefore vitiate the transaction so far as an out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the preference shares were held by outside parties. At the date of the liquidation of Pratts, which was June 22, 1932, a sum of approximately Rs. 4,92,000 was due by Pratts to M.T.s. Sassoons were in the habit of financing M.T. section, and in the years 1926 to 1928 there was a sum of approximately Rs. 9,00,000 due by M.T. s to Sassoons. It appears from the correspondence that in the year 1926 Sassoons commenced to press M.T.s for security for the debt. M.T.s had an immovable property known as the Collins Building, which was a part of the building in which Pratts carried on business and Pratts had two immovable properties; and the correspondence shows that Sassoons wanted to get a mortgage upon all those properties both of M.T.s and Pratts, as security for the money due to Sassoons. Originally it was proposed that there should be two documents one between M.T.s and Pratts and the other between M.T.s and Sassoons' but, in order to avoid expense it was arranged to have one. Accordingly, on February 23, 1928, resolutions were passed by the boards, both of Pratts and of M.T.s., for execution by the respective companies of a security deed in favour of Sassoons, and on February 28, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es four-and-a-half lacs, and Sassoons were entitled to receive four-and-a-half lacs. It seems to me clear that the transaction could have been carried out, as originally suggested by two documents. Pratts could have mortgaged their properties to M.T.s for four-and-a-half lacs, part of the moneys owing, and M.T.s could have assigned either absolutely by way of sale, or by way of security, that mortgage to Sassoons and the actual result brought about by this document could have been brought about in that way by two documents and no question could have been raised. To hold that an arrangement which could have been carried out by two documents cannot be carried out by one document to which all the parties interested are parties, would be to sacrifice substance to form. I think that the case of Seligman v. Prince Co. is an authority for that proposition. I agree with Mr. Coltman that that case is not on all fours with the present case. It would be on all fours if Pratts had agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me that that distinction is not an essential one. The essence of this case is that as between the three parties to the deed Pratts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t time included in the English Companies Act by the Act of 1929; but there is no statutory provision in England corresponding to Section 91-B though the subject-matter of that section, namely the right of directors to enter into contracts on behalf of the company in which they have some personal interest is frequently dealt, with in the articles of association. Now, the position with regard to the directors of Pratts is this. There were always a certain number of directors common to Pratts and M.T.s and from 1922 until 1931, that is to say, during the whole of the material period, the boards of the two companies were common. There were in all seven directors of the two companies. One of those directors was Mr. A. J. Raymond, and another Capt. E. V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more than a director. He was the Managing Director of Sassoons, and, under a power in their articles Sassoons had delegated to him all the powers of the directors. The resolution to that effect is Exhibit 9. Now it is alleged that in 1928, when this mortgage was arranged and executed, all the directors of Pratts were concerned or interested in the matter individually, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are fixed with notice of any limitations on the power of the company contained in the statute under which it is incorporated or in the memorandum or articles of association; but that if it is shown that a particular act was ostensibly authorized by the statute and the memorandum or articles of association, persons dealing with the company are not concerned to see that the company has put itself into a position to exercise its power properly. That is the rule recognized in Royal British Bank v. Tarquand and a great many other cases. It is generally expressed by saying that outside parties are not concerned with the internal management of the company. They are not, for instance, concerned to see that there was proper quorum of directors present, or that persons who were apparently directors of the company had in fact been validly appointed. Those are matters of internal management: and I have no doubt if the disability of a director to vote upon a contract in which he was personally interested were imposed by the articles of association, the question whether he was personally interested in, and entitled to vote upon, a particular contract would be regarded as a matter of internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has relied on Section 87, Companies Act, which requires a list of directors to be filed with the Registrar, and he says that Sassoons, therefore, had notice of who the directors of Pratts and M.T.s were; but it has never been held, as far as I know, in the English cases that people dealing with companies have notice of the contents of all documents on the file of a particular company; and this Court in Pudumjee Co. v. Moos has expressed an opinion against that view. I therefore do not rely on Section 87. Apart from this the first point argued in favour of the view that Sassoons had notice of the common directorship is that they had such notice through Mr. Raymond. Mr. Munshi on behalf of Sassoons has referred us to a good many cases which undoubtedly show that where you have a director common to two companies you cannot impute to both those companies all matters within the private knowledge of the director, The cases referred to are In re Marseilles Extension Railway Co., Exparte Credit Fonder and Mobilier of England ; In re Hampshire Land Co. and Duck v. Tower Galvanizing Co. I may take the general rule as stated in In re Hampshire Land Co. There the headnote, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned to see that those resolutions were in order, because they were the foundation of their title, and if they had taken the trouble to look at the resolutions, they would have seen that they were resolutions passed by the same persons as directors of Pratts and also as directors of M.T.s. So that Sassoons knew in that way that all the directors of Pratts who voted in favour of the execution of the document of February 28, 1928, were also directors, and therefore share-holders of M.T.s, and in that way had an interest conflicting with that of the company, and that their votes therefore could not be counted under Section 91-B. It seems to me, in the circumstances of this case, impossible to hold otherwise than that Sassoons had notice that the votes of the directors of Pratts in favour of the execution of this document, under which they claim, ought not to have been counted by reason of the provisions of Section 91-B. If that is so, the resolution of the directors of Pratts of February 23, 1928 is void, and the execution of the mortgage in favour of Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and Coal Co., Ltd. It was further argued by Mr. Munshi th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the amounts repaid were the authorized borrowing and not the unauthorized borrowing, and we ought, therefore, to come to the conclusion that the whole amount due at the date of the liquidation was the unauthorized borrowing. Why we should apply any equity in favour of his clients who borrowed the money they do not wish to re-pay, I do not know. It is quite clear that the rule in Clayton's case has no application where the question is between moneys borrowed inira vires, and moneys borrowed ultra vires in respect of which the relationship of debtor and creditor never arises. It is clear also that Pratts had the benefit of all these moneys, and as soon as the amount due came to below five lacs, the borrowing was authorized under Article 73.1 entirely agree with the learned Judge that, insofar as it is necessary to rely on any presumption, the presumption would be that the moneys repaid represented in the first place moneys borrowed ultra vires, which never became the property of the company, but remained the property of the lenders. I am not sure that in this case it is necessary to rely on any presumption, because at the material date, namely the commencement of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... think, in view of the admission in the Court below as to the correctness of the account, and the fact that this question as to interest was not argued in the Court below nor taken in the memorandum of appeal, we ought not to direct an account now. In the result, I agree with all the conclusions of the learned Judge in the Court below except the conclusion that Sassoons were not fixed with notice of the disability of the directors of Pratts to vote on the resolution for the execution of the contract in suit. That being so, the appeal against Sassoons will be allowed, and the appeal against M.T.s dismissed. Declared that M.T. s are entitled to a certificate under Rule 702, as unsecured creditors for the amount of their claim. The appeal against M.T. s is dismissed with costs, and the liquidator of Pratts will have liberty to pay the costs out of the assets. The appeal is allowed against Sassoons ; but having regard to the fact that they have succeeded on certain issues in the lower Court and in this Court, they ought not to pay the whole of the costs in both the Courts. Instead of apportioning costs, we propose not to vary the order of the lower Court that the costs of respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relationship of creditor and debtor in respect of the four and a half lacs is created by the deed itself, which has been formally signed and executed by all the three companies. In that document M.T.s have acknowledged receipt of nine lacs from the Sassoons, and Pratts acknowledged receipt of four and a half lacs out of the nine lacs advanced by Sassoons to M. Ts. The recitals may not be literally correct in the sense that there is nothing on the record of the companies corresponding with what is stated in them, but they are not false in substance. To hold otherwise would be, in my opinion, to sacrifice substance to form. There is also a plain recital that Pratts required four and a half lacs for the purpose of their business, that these four and a half lacs were advanced for such purpose, and there is no evidence before us that the money which were within the authorized limit were not used and applied bona fide for the purposes of the company. When moneys borrowed or acknowledged to be due are within the authorized limit, there is no obligation upon the lending company to inquire how the moneys are about to be used nor how in fact they have been used. In my opinion, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oot of the whole matter. Counsel for the liquidator relied on Section 91 B and the proviso to Article 77 of Table A, Companies Act. Sections 91-A, 91-B, 91-C and 19-D have all been added by Act 11 of 1914. Section 14 of the English Companies Act, which was added in the Act of 1929, corresponds in effect to Section 91-A of our Act. There is no section in the English Act corresponding to Section 91-B. Section 91-B provides that where a director is concerned or interested directly or indirectly in a contract or arrangement with the company; he cannot vote on that contractor arrangement; and the proviso to Article 77 in Table A says in effect the same thing, except that the words in the section are "contract or arrangement" and the words in the article are 'contract or work.' It is clear that the interest of the director in the transaction must be personal, and either pecuniary or material. It may be direct or indirect, but it must be adverse to the company of which he is a director. The principle on which it is based has' been well recognized, and it is so direct and inflexible that even the fairness or unfairness of the transaction is immaterial. For instance, directors have been h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the liquidator that there was no independent person present to vote on the resolution giving the security of Pratt's property to the Sassoons, and that all the directors, were, therefore, disqualified to vote. There was no quorum competent to transact business, and therefore, the resolution was invalid, and the deed executed in pursuance thereof was a nullity. On the other hand Counsel for the Sassoons argued that the question of the disqualification of the directors of Pratts, the question whether the meeting was properly called, the question whether there was a proper and competent quorum qualified to vote on the resolution, are all matters of internal or in door management of the company, and do not affect the validity of the contract or transaction so far as outsiders are concerned, under the ruling in Royal British Bank v. Tarquand and a company is bound by its own resolution. A person dealing with limited liability companies is deemed to have notice of its memorandum and articles of association, but he is not bound to inquire into the internal management, and will not be affected by any irregularity of which he has had no notice. He has a right to assume tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Pratts on February 23, 1928, is of importance in this connection. The Sassoons were vitally concerned in the equitable mortgage which Pratts were to give to them. There was previous correspondence between the companies about it. Mr. Raymond was not merely a common director, but he was also present there as manager of the business of the Sassoons, and this certainly was a business transaction, not of Mr. A. J. Raymond, personally, but of the Sassoons. He knew or must be presumed to have known that there was a common board of Pratts and M.T.s., though he may not have appreciated the legal significance of that fact nor thought it his duty to communicate to the Sassoons. There were other circumstances surrounding the transaction which were sufficient to suggest further inquiry. The two resolutions passed on the same day are mentioned under the seals of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in the Court below has stated that if this transaction could have been put through by two documents, it might as well have been put through by one, and there was nothing unusual in its nature as a business transaction. The form may not be unusual, but the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Pratts. There was no reply to either of them; but from that it cannot be inferred that he manifested an intention to adopt the transaction. In my opinion the letters are not sufficient evidence on which any Court can base a finding of standing by or acquiescence on the part of Mr. F. E. Dinshaw. The claim of the Sassoons is based on the deeds. The deeds not being valid and binding for the reasons above stated, they cannot have any claim either as secured or unsecured creditors, for the debts as well as the security are created by the deed of 1928. This brings me to the claim of M.T.s which is really an alternative claim. It is stated in para. 7 of the affidavit of Mr. J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs. E.D. Sassoon Co., Ltd., being admitted, M.T.s will not claim the amount over again. Article 73 of Table A has already been referred to and I need not recite it again. It fixes the directors' limit of borrowing at five lacs. It was, however, argued that borrowings by Pratts were far in excess of the limit of five lacs, but in my opinion there is no ground for assuming that the claim now made, which is below the limit, represents the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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